The sector’s fortunes hinge on the prices of commodities like oil that are highly volatile. Many companies were making record profits in 2018 when crude oil prices spiked above $75 a barrel. Prices receded as consumption softened, with analysts predicting a boom in renewables would bring about peak oil consumption in the foreseeable future. A growing number of Wall Street investors and lenders began taking note of the long-term risks posed by investments in carbon-based industries.
This spring, things got sharply worse with a historic double hit: Shutdowns related to the global pandemic, combined with an international oil-price war, pushed oil prices into negative territory for the first time.
The market rout wreaked havoc on an industry already struggling with massive debt burdens after the recent investment boom. Fossil fuel companies are on the hook to repay over $200 billion in the next four years, including $40 billion this year alone.
Wall Street funders had piled onto fracking in the previous decade, but these investors began to back away as their bets failed to perform. As a consequence, the outside agencies responsible for assessing bond quality started downgrading the companies’ debt, suggesting a higher risk that investors would not be repaid.
Not all the companies were considered good bets to begin with. In the past 18 years, oil and gas companies were among the biggest issuers of “junk bonds” considered too high-risk to meet the investment standards of pension funds and other big investors.
With profits scarce and Wall Street reluctant to bet on the carbon economy, these debt obligations are fueling a wave of bankruptcies that has toppled 226 oil and gas producers – and nearly as many oilfield services companies – since 2015. The rate of failures was expected to increase even before coronavirus affected the entire economy.
Bigger companies are swallowing up smaller ones as they falter, leading to a consolidation and increasing the dominance of a few powerful players players.
The Federal Reserve, using taxpayer money from the Treasury Department, has announced relief programs that would allow recipients, including gas and oil companies, to repay existing debt with low-cost government funds. In other words, taxpayers will provide the exact kinds of loans private investors have increasingly refused to issue as they become more aware of the risks facing the fossil fuel industry.
The pandemic has hastened the industry’s collapse by eliminating demand for fossil fuels from economic sectors like transportation and construction. Using the economic crisis to justify bailouts for the companies that produce them, however, may merely postpone the inevitable.